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Economics: fundamental equations for oil and gas property evaluation (view source)
Revision as of 17:46, 13 January 2014
, 17:46, 13 January 2014→Expected net present value equation for drilling ventures
The financial value of any proposed oil or gas drilling venture can be evaluated by assuming a successful project (Equation 2) and by adding one additional important consideration: the chance of success or failure. This leads to the expected value of the venture, as shown by Equation (3):
The financial value of any proposed oil or gas drilling venture can be evaluated by assuming a successful project (Equation 2) and by adding one additional important consideration: the chance of success or failure. This leads to the expected value of the venture, as shown by Equation (3):
:<math>\mathbf{Equation}</math>
:<math>\text{Expected net present value}</math>
:<math> = \text{ Chance of success (after-tax net present value)}</math>
::<math> - \text{ Chance of failure (after-tax dry hole cost + associated geotechnical and lease costs)}</math>
Thus, ''expected net present value'' (ENPV) represents the risk-weighted value of a proposed drilling venture. Assuming accurate and consistent perception of both reserves and chance of success, ENPV represents the probabilistic value of each venture and thus becomes a primary tool for decision-making and program forecasting. The ENPV is the average value that could be expected if the venture or similar ventures could be repeated many times. Some ventures will result in successes and some will result in failures, but on the average, we expect to make the expected net present value.
Thus, ''expected net present value'' (ENPV) represents the risk-weighted value of a proposed drilling venture. Assuming accurate and consistent perception of both reserves and chance of success, ENPV represents the probabilistic value of each venture and thus becomes a primary tool for decision-making and program forecasting. The ENPV is the average value that could be expected if the venture or similar ventures could be repeated many times. Some ventures will result in successes and some will result in failures, but on the average, we expect to make the expected net present value.
The next questions (covered in the next two chapters) concern methods for estimating (1) reserves, rates, and costs, and for estimating (2) chances of success and failure.
The next questions (covered in the next two chapters) concern methods for estimating (1) reserves, rates, and costs, and for estimating (2) chances of success and failure.
==See also==
==See also==